Income Tax Taxation

What is the Tax Residency Certificate & How to get it?

What is the Tax Residency Certificate & How to get it?

A Tax Residency Certificate is an official declaration of a non-resident’s ability to file taxes in their home nation, provided by those authorities. It makes it possible for people to take advantage of the terms of the Double Taxation Avoidance Agreement and avoid paying double tax on their income generated abroad.

What is Double Taxation Avoidance Agreement (DTAA)?

A bilateral agreement known as a double taxation avoidance agreement (DTAA) is made between two countries in order to avoid double taxes on the same income in both jurisdictions. By removing the burden of paying taxes twice on the same income obtained by individuals or companies in different countries, this agreement aims to stimulate international commerce and investment.

When an individual or company earns money from a particular nation and is then required to pay taxes on that money in the place where it was made (the source country), double taxation is a possibility. Due to their position as tax residents, they could also be taxed on the same income in their place of residence (residence country).

What is Tax Residency Certificate?

An official document issued by a country’s tax authorities that attests to a person’s or an entity’s tax residence status for a certain fiscal year is known as a Tax Residence Certificate (TRC). When claiming advantages under double taxation avoidance agreements (DTAAS) with other nations, the certificate serves as proof that the bearer is regarded as a tax resident in the country that issued it. Preventing double taxation of income is the primary goal of a Tax Residency Certificate.

According to the DTAA framework, taxpayers who make money abroad may be subject to taxation in both their home country and the nation where the income was generated. DTAA agreements are made between countries to prevent this double taxation and to help taxpayers. Based on the taxpayer’s residency status, these treaties assign taxation rights to one nation or the other.

Advantages of Tax Residency Certificate

  • Avoiding Double Taxation:
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Preventing double taxation is one of the main advantages of a Tax Residency Certificate. The amount of discretionary income that an individual has when their income is taxed in two distinct nations may be drastically reduced. The TRC enables the taxpayer to take advantage of benefits under the Double Taxation Avoidance Agreements (DTAA) between India and other countries and aids in establishing tax residence in India. By virtue of this agreement, income is only taxed once, either in the nation of residency or the country where it is earned.

  • Acknowledgement as a Tax Resident:

Possessing a Tax Residency Certificate improves one’s reputation as an Indian tax resident abroad. To implement the necessary tax laws, several nations demand a TRC to prove a person’s status as a resident for tax purposes. This recognition streamlines the processes for filing taxes, ensures transparency, and eliminates fruitless tax assessments in other countries.

  • Ease of Tax Compliance:

For Indian residents who earn money abroad, TRC makes submitting tax returns simpler. Taxpayers can appropriately declare their profits to Indian tax authorities if they have the necessary documents, such as the TRC and information on overseas income. As a result, there are fewer opportunities for errors, fewer audit questions are raised, and overall tax compliance is improved.

  • Reduced Withholding Tax Rates:

Through TRC, qualifying individuals can use lower withholding tax rates on particular income kinds. Withholding tax, sometimes referred to as tax deducted at source, is the tax that is withheld by the payer before sending the recipient’s income. Overseas nations may provide lower withholding tax rates to Indian citizens under the DTAA, sparing them from higher tax deductions on overseas income.

Form 10F

The Non-residents file Form 10F to avail the benefits of the double taxation avoidance agreement between the resident country and the country from which they earn income. Sections 90 and 90A of the Income Tax Act of 19611 talk about tax residency certificates, which can be availed by filing this form. By filing this form, the chances of unnecessary litigations are reduced, and it ensures that tax compliance is there.

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The Process of getting a Tax Residency Certificate for Non-Residents

Any person or company deemed to be a non-resident must get a Tax Residency Certificate (TRC) from the government of the nation or designated territory where they assert to be a resident, per Indian income tax legislation. The following details have to be included in the TRC:

  • The taxpayer’s name
  • Status of the taxpayer (such as individual, business, or corporation)
  • Country/specified territory of incorporation or nationality, as well as registration (for others)
  • The taxpayer’s tax identification number in the nation or designated territory of residence.

If not accessible, any unique number that the government of that nation or particular area uses to identify the individual as a resident.

  • Status as a resident for tax reasons
  • Address of the taxpayer throughout the appropriate time within the certificate’s validity term.

The Procedure Required For Obtaining a Certificate for Claiming Relief under an Agreement Referred To In Sections 90 and 90A Is Specified Under Rule 21AB of the Income Tax Rules.

  • The assessee must submit the necessary information, such as their name, residence, nationality, time period, and residential status, to claim Relief under an agreement mentioned in Sections 90 and 90A.
  • The government of the nation or designated territory where the taxpayer claims to be a resident and intends to get tax relief must accredit the certificate described above.
  • The assessee might not need to provide the necessary information individually if it is already there in the certificate referred to in sections 90 or 90A.
  • The assessee must keep records supporting the information submitted because income-tax authorities have the authority to ask for these records in relation to any relief claims made under an agreement stated in sections 90 and 90A.
  • For the purposes of the agreements outlined in sections 90 and 90A, the assessee must submit an application to the Assessing Officer in Form No. 10FA if they are an Indian resident.
  • The Assessing Officer will issue a residency certificate in Form No. 10FB after they are satisfied with the application.
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Conclusion

The Tax Residency Certificate (TRC) is crucial for Indian citizens with overseas income. To ensure tax efficiency, it serves as a vital instrument for avoiding double taxation and lowering withholding tax rates. TRC also makes tax compliance simpler, gives access to special tax advantages, and raises one’s reputation as an Indian tax resident overseas. Taxpayers may easily handle cross-border transactions using the TRC, encouraging investments and commercial prospects.

FAQs

  1. What is the requirement for tax residency in India?

    To be a resident of India, an individual has to reside in India for more than 182 days in a financial year.

  2. What is the validity of the TRC certificate in India?

    The tax residency certificate is valid till the end of one financial year.

  3. Can Form 10F be used instead of TRC?

    No, Form 10F cannot be used instead of a tax residency certificate.

  4. Can Form 10F be filed without TRC?

    A tax residency certificate has to be furnished when filling out Form 10F.

  5. Is it mandatory to file form 10F?

    It is mandatory to file Form 10F.

  6. Who issues tax residency certificates in India?

    The Income Tax Department of India issues the tax residency certificate in India.

  7. What is Form 10F of the Income Tax Act?

    Non-residents must file Form 10F to get the benefits of double taxation avoidance agreements.

  8. Which section is the tax residency certificate?

    Section 90 and Section 90A are the sections for tax residency certificates.

Read our article:DTAA – What is the Double Taxation Avoidance Agreement?

References

  1. https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx

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